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The third-party access regime

Article 18 of the Second Gas Directive obliges EU Member States to ensure the implementation of a system of regulated TPA (“rTPA”) to the transportation and distribution system, and LNG facilities based on published tariffs, applicable to all eligible customers, including supply undertakings, and applied objectively and without discrimination between system users.

Member States are to ensure that these tariffs, or the methodologies underlying their calculation, are approved prior to their entry into force by the relevant national regulatory authority and that these tariffs —and the methodologies, where only methodologies are approved —are published prior to their entry into force. TSOs are, if necessary for the purpose of carrying out their functions, including in relation to cross-border transportation, to have access to the network of other TSOs.

Access to storage

Article 19 of the Second Gas Directive sets out the conditions for TPA to storage facilities: When it comes to access to storage facilities, linepack, and ancillary technically necessary services, Member States could opt for either a system of rTPA or negotiated TPA (“nTPA”). Procedures for both rTPA and nTPA have to operate in accordance with objective, transparent and non-discriminatory criteria.

Special provisions are made for ancillary services and temporary storage that are related to LNG facilities which are necessary for the re-gasification process and subsequent delivery to the transportation system. In the case of nTPA, Member States are under the obligation to take the necessary measures for natural gas undertakings and eligible customers either inside or outside the territory covered by the interconnected system to be able to negotiate access to storage and linepack, when technically and/or economically necessary for providing efficient access to the system, as well as for the organisation of access to other ancillary services.

The parties, in turn, are obliged to negotiate access to storage, linepack and other ancillary services in good faith. Contracts for access to storage, linepack and other ancillary services have to be negotiated with the relevant storage system operator or natural gas undertakings

Storage system operators and natural gas undertakings were originally obliged to publish their main commercial conditions for the use of storage, linepack and other ancillary services within the first six months following implementation of the Second Gas Directive and now on an annual basis.

Where a Member State has opted for rTPA, it has to take the necessary measures to give natural gas undertakings and eligible customers either inside or outside the territory covered by the interconnected system, a right of access to storage, linepack and other ancillary services, on the basis of published tariffs and/or other terms and obligations for use of that storage and linepack, when technically and/or economically necessary for providing efficient access to the system, as well as for the organisation of access to other ancillary services.

This right of access for eligible customers may be given by enabling them to enter into supply contracts with competing natural gas undertakings other than the owner and/or operator of the system or a related undertaking.

Access to upstream pipeline networks

Pursuant to Article 20 of the Second Gas Directive, Member States have to take the necessary measures to ensure that natural gas undertakings and eligible customers, wherever they are located, are able to obtain access to upstream pipeline networks. This includes facilities supplying technical services incidental to such access, except for the parts of such networks and facilities which are used for local production operations at the site of a field where the gas is produced. Member States must notify their chosen measures to the European Commission.

The Second Gas Directive gives Member States a broad scope in implementing these measures, but provides that the measures have to be based on:

fair and open access

achieving a competitive market in natural gas and avoiding any abuse of a dominant position, taking into account security and regularity of supplies

capacity which is or can reasonably be made available

environmental protection

Member States may take the following criteria into account when determining the relevant measures:

the need to refuse access where there is an incompatibility of technical specifications which cannot reasonably be overcome

the need to avoid difficulties which cannot be reasonably overcome and could prejudice the efficient, current and planned future production of hydrocarbons, including that from fields of marginal economic viability

the need to respect the duly substantiated reasonable needs of the owner or operator of the upstream pipeline network for the transport and processing of gas and the interests of all other users of the upstream pipeline network or relevant processing or handling facilities who may be affected

the need to apply their laws and administrative procedures, in conformity with Community law, for the grant of authorisation for production or upstream development

Member States also need to ensure that they have in place dispute settlement arrangements, including an authority independent of the parties with access to all relevant information, to enable disputes relating to access to upstream pipeline networks to be settled expeditiously.

In the event of cross border disputes, the dispute settlement arrangements for the Member State having jurisdiction over the upstream pipeline network which refuses access are to be applied.

Refusal of access

Under article 21 of the Second Gas Directive natural gas undertakings may refuse access to the system on the basis of:

lack of capacity, or

where the access to the system would prevent them from carrying out the public service obligations assigned to them, or

Undertakings refusing access to their system must give duly substantiated reasons

Member States may take the measures necessary to ensure that the natural gas undertaking refusing access to the system on the basis of lack of capacity or a lack of connection makes the necessary enhancements as far as it is financially viable to do so or when a potential customer is willing to pay for them.

New infrastructure

Article 22 of the Second Gas Directive provides that major new gas infrastructure, ie, interconnectors between Member States, LNG and storage facilities, may, upon request, be exempt from the provisions in the Second Gas Directive relating to TPA to such facilities. Significant increases of capacity in existing infrastructure and to modifications of such infrastructure which enable the development of new sources of gas supply may also be exempt. An application for an exemption must meet the following criteria in order to be granted:

the investment must enhance competition in gas supply and enhance security of supply

the level of risk attached to the investment is such that the investment would not take place unless an exemption was granted

the infrastructure must be owned by a natural or legal person which is separate at least in terms of its legal form from the system operators in whose systems that infrastructure will be built

charges are levied on users of that infrastructure

the exemption is not detrimental to competition or the effective functioning of the internal gas market, or the efficient functioning of the regulated system to which the infrastructure is connected

The relevant national regulatory authority decides, on a case by case basis, on the exemption applications.

The exemption regime

The exemption regime is quite complex, and, given its potential impact on investment decisions, is worthy of a closer examination:

Exemptions will generally only be granted in exceptional circumstances and on a case-by-case basis. There will be no block exemptions for specific types of infrastructure and all cases will be assessed on their merits. This consideration is particularly relevant as there is no possibility of exemptions for existing infrastructure and therefore any decision to give new pieces of infrastructure a different status must be clearly justified.

In general, it is expected that exemptions cannot apply where an existing dominant market position is created or reinforced or where the granting of an exemption reduces the scope for diluting existing dominant positions. Similarly, an exemption will not normally be considered where there is little chance of a similar competing piece of infrastructure being constructed which would provide a similar function, whether for geographical, engineering or economic reasons.

An exemption may cover all or parts of, respectively, the new infrastructure, the existing infrastructure with significantly increased capacity or the modification of the existing infrastructure. Normally it will be expected that developers seeking exemptions will have, as far as possible, given other parties an opportunity to gain access to the new facility at the planning and feasibility stage, for example through an open season procedure. Alternatively, developers should create the possibility for a minimum level of TPA to the new infrastructure under the rules of the Second Gas Directive for a certain proportion of its capacity.

There is some debate as to what constitutes “new major infrastructure”. For the purposes of the Second Gas Directive, a new piece of infrastructure (or significant increase to the capacity of existing infrastructure) is a project for which the main financial commitment to construction will be made after 15 July 2003. For existing investments, ie, those for which the main financial commitment was made before 15 July 2003, no exemptions may be awarded.

A “major” or “high cost” piece of infrastructure in the sense of the legislation is a project which, including all its component parts would, if underwritten by regulated tariffs, significantly increase final customers’ bills. An example of a suitable rule of thumb might be that to be defined as a “major investment”, the project would have to have a capital cost of more that €10 per connected customer.

A risky investment, for the purposes of the exemption, is one where at least:

the investment concerned is a sunk cost, in that the asset concerned cannot be recovered and re-used for another

where the projected benefits of the investment to consumers as a whole are difficult to evaluate due to the range of possible events that might occur subsequent to the investment being committed

Examples of this include variations in consumption projections, other alternative competing investments being made, changes in world market conditions for primary fuels or an above average amortisation period for such type of investment.

In deciding to grant an exemption consideration will be given, on a case by case basis, to the need to impose conditions regarding the duration of the exemption and non-discriminatory access to the interconnector.

The European Commission expects that the following factors are taken into consideration by the relevant National Regulatory Authority (“NRA”) when making a decision to grant an exemption:

the Regulation to “take into account” revenue collected as a result of congestion allocation procedures in the setting of charges for the overall use of the network.

Similar commitments might also be made in relation to capacity allocation. In this event, any decisions relating to the methodology for tariff setting or capacity allocation to be used for specific interconnectors, or other infrastructure, should be published and comply with the Second Gas Directive and the Regulation.

B.5.2 TPA in the electricity industry

Article 20 of the Second Electricity Directive sets out the legal framework for third party access to the electricity transmission and distribution systems. In the electricity sector, Member States are obliged to ensure the implementation of a system of rTPA to the transmission and distribution systems based on published tariffs, applicable to all eligible customers and applied objectively and without discrimination between system users. The applicable tariffs, or the methodologies underlying their calculation, have to be approved by the relevant NRA and be published prior to their entry into force.

A TSO or DSO may refuse access where it lacks the necessary capacity. Duly substantiated reasons must be given for such refusal and Member States need to ensure, where appropriate and when refusal of access takes place, that the relevant TSO or DSO provides relevant information on measures that would be necessary to reinforce the network. The party requesting such information may be charged a reasonable fee reflecting the cost of providing such information

When granting an exemption, the relevant NRA may determine the rules and mechanisms for management and allocation of capacity insofar as this does not prevent the implementation of long term contracts.

Finally, the scope and duration of the exemption should be proportional to the objective being pursued. The granting of an exemption by regulators or Member States will be motivated by their desire to protect customers against having to underwrite projects where the ratio of benefits to costs is uncertain and where the cost is particularly high. The details of the exemption to be awarded should therefore be in proportion to these parameters.

In the case of an interconnector any exemption decision shall be taken after consultation with the other Member States or regulatory authorities concerned.

The exemption decision, including any conditions must be duly reasoned and published. The relevant NRA must also notify its decision without delay to the Commission together with all the relevant information supporting the decision.

Within two months after receiving a notification, the Commission may request that the NRA or the Member State concerned amend or withdraw the decision to grant an exemption. The two-month period may be extended by one additional month where additional information is sought by the Commission.

If the NRA or Member State concerned does not comply with the request within a period of four weeks, the Commission is entitled to take a final decision in accordance with the procedures laid down in the Second Gas Directive.

Examples of exemptions granted pursuant to the above provisions include the Brindisi LNG terminal, the Bacton- Balgzand Pipeline, the Dragon LNG terminal, the South Hook terminal, the Isle of Grain LNG terminal and the North Adriatic LNG terminal7.

Special treatment without exemption

It should be noted that the NRA already have the possibility to impose different sets of rules in relation to different pieces of infrastructure, both existing and new, without need to resort to the exemptions regime under the Second Gas Directive.

For example, regulators or Member States could, without any exemption being necessary, decide to give incentives to develop specific types of investment. This could, for example, be achieved by setting an allowed rate of return above the amount normally allowed for the main network. Regulators may also give long term commitments to a certain tariff structure or tariff methodology.

This would be permitted provided that the regulatory framework fulfilled the requirement of the regulator to “approve a tariff methodology in advance”, as set out in the Second Gas Directive and, if relevant, the requirement in the Regulation to “take into account” revenue collected as a result of congestion allocation procedures in the setting of charges for the overall use of the network.

Similar commitments might also be made in relation to capacity allocation. In this event, any decisions relating to the methodology for tariff setting or capacity allocation to be used for specific interconnectors, or other infrastructure, should be published and comply with the Second Gas Directive and the Regulation. B.5.2 TPA in the electricity industry

Article 20 of the Second Electricity Directive sets out the legal framework for third party access to the electricity transmission and distribution systems. In the electricity sector, Member States are obliged to ensure the implementation of a system of rTPA to the transmission and distribution systems based on published tariffs, applicable to all eligible customers and applied objectively and without discrimination between system users. The applicable tariffs, or the methodologies underlying their calculation, have to be approved by the relevant NRA and be published prior to their entry into force.

A TSO or DSO may refuse access where it lacks the necessary capacity. Duly substantiated reasons must be given for such refusal and Member States need to ensure, where appropriate and when refusal of access takes place, that the relevant TSO or DSO provides relevant information on measures that would be necessary to reinforce the network. The party requesting such information may be charged a reasonable fee reflecting the cost of providing such information.